FTX’s ‘raw’ bankruptcy filings likely bode ill for investors, lawyers say

The initial “bare bones” bankruptcy filings submitted by FTX could portend a poor outcome for clients whose funds are frozen, partners at law firm Kleinberg Kaplan told Blockworks.

FTX Has Been Slower Than Other Bankrupt Crypto Companies to publicly detail the troubled company’s plans to restore creditor integrity. According to the lawyers, more clarity around FTX’s balance sheet and creditors is needed to properly analyze the chances of exchange funds returning.

The New York company responded to calls from concerned investors. FTX founder Sam Bankman-Fried has stepped down as CEO in the aftermath of the explosion, as John J. Ray III, who years ago oversaw the liquidation of outrageous energy company Enron, was named the company’s new chief executive.

Kleinberg Kaplan’s affected clients include investors with frozen FTX accounts and shareholders, as well as crypto-focused businesses with indirect exchange exposures that are considering the likelihood of an even deeper market downturn. The company declined to identify specific customers.

“The filing was only made on Friday, so there’s still a lot of information out there in the market and to let people know what this all means,” Jared Gianatasio told Blockworks.

Lawyers for Landis Rath & Cobb and Sullivan & Cromwell, representing FTX and its subsidiaries, said in a bankruptcy movement monday until a million creditors could be named in the lawsuit.

The petition also requested a waiver from filing a list of top 20 creditors for each of the 134 FTX-affiliated entities that filed for Chapter 11 bankruptcy — asking instead to allow a consolidated list detailing the top 50 creditors of all FTX companies by Friday.

Along with Gianatasio, fellow law firm partners Matthew Gold and Dov Kleiner explain below, from a regulatory and legal perspective, what has already happened – and what the entities stuck in the trouble can be expected as FTX’s bankruptcy unfolds.

Jared Gianatasio, partner of Kleinberg Kaplan | Source: Kleinberg Kaplan

Blockages: How would you compare the bankruptcy of FTX to those of digital travel and Celsius earlier this year?

Gianatasio: The speed, in terms of FTX failure, was so fast. You saw that the Chapter 11 repository was very stripped down. It was kind of skeletal in its coverage, compared to Celsius and Voyager, where there was stronger documentation in terms of a list of creditors on day one and there was just a lot more information.

Gold: Decidedly, the FTX filing proceeded at a much slower pace. Voyager and Celsius debtors were more organized at first. Presumably, the lawyers had a little more notice that a filing was going to take place.

I try to be a little careful about what we can get out of it. This seems to be bad news for the FTX parties – that according to numerous reports it is linked to all sorts of regulatory and possibly criminal investigations and turnover at the top of the company, which n haven’t really been checked.

It’s possible this was just a blip, and FTX just got a little behind as it was setting up its indie team.

Blockages: What are the next steps you expect as the bankruptcy progresses?

Gold: What we expect in the short term is that the new management of FTX will begin to fill some of the gaps that have been missing so far. They will start providing information about the identity of their group of creditors, information about their assets, an official statement on any rumors circulating about hacks – and other asset-related stuff.

And then, perhaps, we’d expect some sort of indication from management and their attorneys about their immediate plans and how they’re going to proceed. Typically, these would come out a day or two after a bankruptcy filing, but I’m still hopeful…in the next few days we will.

It would usually look like things like, “Will they look to sell their assets if they think they have things to sell? Will they try to maintain their exchange in any way? How much business do they think they have that they can possibly resuscitate at this point? And to what extent is it simply a matter of determining the value of their remaining assets? »

Blockages: And now what?

Gold: Once they have sketched out what they are trying to do, we can react, and the community can react, as to their credibility.

Then the process [really] starts… and we start talking about when investors and other parties can get their money back.

In Celsius, and Voyager to some extent, which are our closest comparisons, they split what they had into different buckets, based on what kinds of deals the investors had and what rights they had to those assets.

They delivered a few of them in a relatively short time to customers. Some, they said, “you’re not going to get any at all,” and some they put in a bucket in the middle. Basically, among all those who didn’t get it right away, there are ongoing litigations… which can take months to unfold.

Then we move on to the larger group: In case of bankruptcy, we call them “general unsecured creditors” who have no rights to a particular property and simply hope for global recovery. It may take a year or more.

At this point, the speed at which it moves is less dictated by the particular requirements of bankruptcy law and more dictated by the business realities of each case. How long, for example, will it take to liquidate cash assets?

Blockages: You mentioned that a secondary market could arise, where creditors could sell their rights to assets at a discount?

Gianatasio: It weighs the probability of recovery with the recovery schedule.

[If] retail customers need a portion of their capital, they might be willing to sell 5 or 10 cents on the dollar. It is a difficult position.

Kleiner: It’s incredibly early for something like this, especially [with] so much uncertainty. That’s not to say people won’t do it, as it can be high risk and very high reward.

If you look at the cases, from Voyager to Celsius to FTX, they’ve been ranked in order of increasing complexity. There are also more and more [magnitudes] uncertainty around statements. So I would say there’s virtually no visibility or confidence or confidence, at the moment, in what the assets are.

Blockages: What do you see as contagion effects of FTX’s collapse?

Gianatasio: As we’ve seen in Voyager and Celsius, I think these are significant bankruptcy cases, but I think they’re pretty self-contained for the crypto and digital asset ecosystem. I don’t think they will have too much impact on financial markets in general.

FTX is an important example, however, of a trader that presented itself as this champion of risk management and investor protection.

The interview has been edited for clarity and conciseness.

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  • Ben Strack
    Ben Strack is a Denver-based journalist who covers macro and crypto-native funds, financial advisors, structured products, and the integration of digital assets and decentralized finance (DeFi) into traditional finance. Prior to joining Blockworks, he covered the asset management industry for Fund Intelligence and was a reporter and editor for various local Long Island newspapers. He graduated from the University of Maryland with a degree in journalism. Contact Ben by email at [email protected]